Hot Docs: "Illegal hotels" now illegal

March 3, 2011

Statue of Liberty with ManhattanNew York City’s housing situation is a bit unique.  Because of the limited space and high housing demand, the city has been forced to take several unusual regulatory steps over the years.

Last week, two landlords filed suit claiming the latest housing regulation to be an unconstitutional taking prohibited by the Fifth Amendment to the U.S. Constitution.

The regulation targets “illegal hotels,” of which the two plaintiffs are landlords.  “Illegal hotels,” as they are pejoratively, yet widely known, are basically apartment buildings that landlords rent out in short-term leases to tourists, transients, and other temporary guests.

Landlords engage in this behavior because there’s a significant economic benefit: fire and safety regulations are more relaxed for apartments.

Hot Doc: Dexter 345 Inc. v. Cuomo

Source: Westlaw News & Insight – National Litigation

So why is it a problem?

As you can imagine, it wouldn’t be particularly pleasant living above a hotel room or a youth hostel.  Aside from the noise issues, it’s clearly less safe to live in the same building as temporary guests that may not even be from the city or country.

In addition, with the chronic shortage of NYC housing, “illegal hotels” take up valuable living space.

Lastly, as mentioned above, the regulations for apartments are laxer than for hotels.  Consequently, many tourists book their trip online only to find a mildew-infested basement with very questionable bed sheets.

It should come as no surprise that the city has been trying to fight the practice: landlords indeed benefit, but everyone else loses.

However, a major blow against the city came in a 2009 court case that ruled “illegal hotels” were not illegal as long as a majority (i.e. 51%) of the units are held by “permanent occupants.”

That case accelerated what was already brewing in the New York State Senate.  In July 2010, the law was enacted that closed the loophole in the housing code, requiring apartments to enter into leases of at least 30 days, and thereby truly making “illegal hotels” illegal.

Of course, landlords of such properties, like our challengers, did not like the change.

Claiming the law is a taking of property under the Fifth Amendment, the plaintiffs want the law declared unconstitutional.

However, the plaintiffs have an uphill battle.  Since they called their economic loss only a “partial taking,” such a loss is only recognized in very limited circumstances under current takings jurisprudence.  In fact, the Supreme Court has never awarded just compensation to a partial taking.

The claim would be evaluated under the framework set out by Penn Central v. New York, under which the plaintiffs’ claim looks even bleaker.

The Penn Central test would essentially look at the amount of economic harm suffered, and the extent the government’s action physically encroached on the property.

In short, while the plaintiffs have surely suffered an economic harm, they can still rent the property to permanent occupants, so the economic harm is relatively negligible.

Even if the economic harm was great, states hold the long-recognized power to regulate property to control nuisances, and it would take little imagination to classify “illegal hotels” as such.

Regardless of the complaint’s lack of legal merit, it has revealed another facet of the always interesting New York City housing scene.